Factoring Companies Vs Debt Collection Companies
As any business owner knows, one of the most frustrating aspects of having your own business is waiting for late payments. If your clients are frequent late payers, or it’s been a long time since you issued that last invoice, you may be considering calling in some debt collectors to chase down your coin.
But if it’s just a case of wanting to improve your cashflow, instead of waiting 30 days or more to free up the cash tied up in your unpaid client invoices, invoice factoring could be the answer. So what’s the difference between debt collection agencies and factoring companies, and which is right for your business?
Don’t Confuse the Two!
There’s actually a significant difference between debt collection companies and factoring companies and it’s important not to confuse the two. The first, main difference relates to the timescales involved with invoices. Debt collectors generally deal with invoices that are at least 60 days old and remain unpaid, and some companies employ aggressive tactics to chase customers for payment.
Invoice factoring on the other hand, involves unpaid invoices that have been issued in the last 30 days – so they’re not overdue yet, but you’d quite like access to the funds tied up in them anyway! With factoring companies, you can avoid the bad debt that may leave you in need of debt collection services in the first place.
How Quickly Do You Want to Get Paid?
Another key difference between debt collectors and factoring companies is the speed at which they work. Invoice factoring is designed to give you near instant access to the funds tied up in your unpaid invoices. This means it’s a great choice to boost your cashflow and ensure you always have cash on hand to meet your business commitments.
With invoice factoring, your funder can usually release funds within 24 hours. Debt collection, on the other hand, involves a much lengthier process. The debt collector chases your clients for payment and you won’t receive a penny until they pay up – if that ever happens at all.
How Big is Your Budget?
The final main difference between these two types of companies lies in the cost of the service they offer. Some debt collection agencies have fees of between 25-30%, a significant chunk of your invoices. Invoice factoring releases between 70-90% of the value of your unpaid invoice directly to you. You’ll then be paid any remaining balance (minus the funder’s small fee), when the customer pays their invoice.
Spot Factoring is the Exception
The exception to this is spot factoring, where you sell individual invoices to a factor (typically those in excess of £50,000) and receive between 70% and 80% as a cash advance. Spot factoring fees tend to be higher than traditional invoice factoring, because it’s a one-off, flexible service. This type of factoring is also slower to set up, so it’s not ideal if you’re looking for regular, stable cashflow. Also, most spot factoring companies insist on chasing clients for payment, so you’re no longer in control of your customer relationships.
With traditional factoring, you can opt for invoice discounting which allows you to maintain customer relationships personally, ensuring your customers get the service they are accustomed to.
Keep it Simple – Keep it Simply
As you can see from the above, a vast chasm divides the services offered by factoring companies and debt collection companies. So if you’re looking to improve your company’s cashflow and boost growth, invoice factoring is a great solution.
You can get in touch with Simply Factoring Brokers at any time to find out more about the service we offer. Just give us a call on 0330 134 2826 for free, no-obligation advice. If you’d prefer to write to us, you can drop us an email at firstname.lastname@example.org and one of our experts will get back to you.
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